Media Missed Clues to Enron’s Troubles

A Fortune magazine survey called it the most innovative company in the country--for six straight years. The New York Times said it was “a model for the new American workplace.” The Dallas Morning News described it as “one of the most envied and respected corporations in the United States.” Business Week looked at one of its pioneering ventures and said, “The risk is remarkably small.”

That “low-risk” broadband venture by Enron Corp., the billion-dollar, Houston-based energy trader, wound up with a $102-million operating loss in the second quarter last year and was but a prelude to a complete corporate collapse, the biggest bankruptcy in U.S. history.

For the most part, until the Enron collapse was well underway, the nation’s news media--including the presumably sophisticated financial outlets--missed a number of early warning signs and failed to alert the public to the company’s potentially precarious situation.

“When something this big comes as this much of a shock, it suggests that something has been very wrong with the journalism,” says Robert Lichter, co-director of the Washington-based Center for Media and Public Affairs.

John Olson, an investment analyst in Houston, was one of the few in his field--and in his city--who was not on the Enron bandwagon. He says there were “signposts out there for people to see, but the company kept giving the media head-fakes and playing hardball.”

Olson, of the Sanders Morris Harris Group, says a number of former Enron employees and associates repeatedly warned him to “be careful. . . . The numbers aren’t what they seem to be.”

Jim Chanos, president of Kynikos Associates in New York, began issuing similar warnings in the fall of 2000 after reading a column in the regional Texas edition of the Wall Street Journal warning that the extraordinarily high price/earnings ratio for Enron and two other Houston energy companies suggested that “investors . . . could be in for a jolt down the road.”

That column prompted Chanos to do his own research and to start selling short on the stock--in effect, betting it would decline--and to talk to two other journalists who wrote relatively brief, early stories raising questions about the company.

Media Ignored the Red Flags

The warning signs? There was a major, longtime discrepancy between Enron’s profits and its cash flow. Its return on investment also was remarkably low for such a high-risk venture. Its financial statements were incomprehensible. Its top executives repeatedly were selling huge quantities of the company’s stock. A surprisingly large number of senior executives were leaving--68 of them over an 18-month span.

All these red flags, many financial experts and journalists now say, should have triggered intense media scrutiny. Instead, says the New York Post’s Christopher Byron--a longtime financial writer who’s worked for Forbes, New York magazine, Esquire and the New York Observer--”too much of the media were part of the cheerleading squad for Enron.”

Did Byron take a hard, early look at Enron?

No.

“I’m in New York and I saw Enron as just an out-of-town energy trading company--obviously a . . . mistake in judgment on my part,” he now concedes, echoing comments made by many other journalists.

Why did most of the national media--and the home-state Texas media, for that matter--miss the Enron story?

“I think it was in part a product of the bull market of the ‘90s,” says Jim Michaels, whose tenure as editor of Forbes magazine from 1961 to 1998 featured many aggressive investigative stories on just such go-go companies as Enron.

“Everyone was investing in the market, and the market was going up and up, and people didn’t want to hear bad news,” Michaels says. “I think there’s been too much emphasis in recent years on these great success miracle stories, and too many reporters have gotten away from doing the hard, slogging reporting--looking at the footnotes in disclosure documents, wading through the dry-as-dust numbers and asking the tough questions about them that would have cast a great deal of doubt on the Enron ‘miracle.’ ”

But the media’s failure concerning the Enron story was “part of a total failure by everyone, a complete breakdown in the system, in all the checks and balances,” says Frank Lalli, editor of Money magazine from 1989 to 1998. “It was a failure by the Wall Street analysts who just went along for the ride, and by the auditors who were collecting so much money they couldn’t walk away from it, and by the government agencies who are supposed to monitor these companies.”

Relying on the Analysts

Like investors, many financial reporters rely heavily on stock analysts. But analysts often have an inherent conflict of interest. Companies such as Enron have considerable leverage over them, saying (implicitly, if not explicitly), “We support the analysts who support our stock,” meaning they’ll give their lucrative investment banking business to those firms whose analysts issue strong “buy” recommendations for their stock.

That’s why analysts get paid so much, says Gordon Howald, an energy analyst for Credit Lyonnais. “It’s not because they write nice reports with glossy covers. It’s because they help generate fees for their firms by taking a very, very optimistic view of a stock, even if they don’t necessarily believe it.”

On Oct. 24, more than a week after Enron admitted a $618-million quarterly loss and a $1.2-billion drop in equity, 13 of the 16 analysts who rated Enron still recommended that investors buy the stock and only one recommended selling.

Some reporters did ask tough questions of Enron and its analysts, and some did study disclosure statements and other documents, “but when the guys running the company are telling flat-out lies to you . . . and when the filings are fraudulent,” Lalli says, “I think it’s a tall order for somebody to expect the press to come in and take this very complicated company apart.

“The press doesn’t have subpoena power, and without that, the only way you can do the story is if you have someone on the inside, a whistle-blower who can tell you what happened and walk you through it.”

Ultimately, that’s what helped the Wall Street Journal “blow the story open,” in the words of Joseph Nocera, executive editor of Fortune.

The Journal came relatively late to the story too, though. Enron was formed in 1985 and was a billion-dollar company by the end of the 1990s. Except for that one skeptical Texas column in September 2000, the paper didn’t begin to thoroughly examine Enron’s business practices in print until the last five months of last year. By then, Enron had been a highflier and a fast faller, with its stock price at less than half its peak.

“You can always say you should have done more, sooner,” says Paul Steiger, managing editor of the Journal. But when a company’s lawyers and accountants are playing hiding games with their Securities and Exchange Commission disclosures, “it’s very hard to crack,” Steiger says.

Once the paper’s reporters began looking hard at Enron, “the Journal lapped the field,” says Michael Hiltzik, a veteran business reporter at the Los Angeles Times.

The Journal’s breakthrough did not begin with a whistle-blower but with a resignation.

To Rebecca Smith, who covers the energy industry for the Journal, the resignation in August of Enron chief executive Jeffrey Skilling was “the point of no return.”

She and several Journal colleagues had long been uneasy about Enron’s rapid growth, high stock price, opaque accounting procedures and swaggering leadership. But when Skilling suddenly announced he was resigning for “personal reasons” just six months after taking the job he had coveted for years, Smith decided, “Something clearly was going on.

“His quitting made absolutely no sense, and we know that when we say that,” she added, “it really means that it does make sense but we just don’t know enough yet to figure it out.

“That’s when I started to look seriously at Enron’s ‘black box’ accounting.”

Wondering Where the Money Comes From

Many other journalists also had long been dubious about Enron’s meteoric rise. A few--very few--had even written about their concerns. Five months before Skilling’s departure, for example, Bethany McLean wrote a story for Fortune magazine headlined “Is Enron Overpriced?” The story asked bluntly, “How exactly does Enron make its money?” and it essentially concluded that no one--not Wall Street analysts, not investors, not journalists--really knew because the company’s business practices were “largely impenetrable . . . mind-numbingly complex . . . deeply frustrating . . . mysterious.”

“I’m pretty sophisticated,” says Newsweek’s Allan Sloan, who has long specialized in writing business stories that slice through the gobbledygook of balance sheets, “but I don’t think I would have seen what was wrong with their numbers unless someone hit me over the head and pointed it out it to me.”

Not only were the company’s financial statements opaque, but Skilling, former Chief Financial Officer Andrew Fastow, and founder and Chairman Kenneth L. Lay--who resigned this week--all were notorious for stonewalling or giving misleading answers to reporters’ questions.

Skilling called McLean unethical and hung up when she questioned him, and Lay and Fastow tried to persuade her editors that the company had no problems. Nocera, the Fortune editor, says he was “in the room when McLean asked Fastow point-blank” about two of the company’s subsidiary partnerships that later became controversial, “and he said he couldn’t talk about that for ‘competitive reasons.’

“It was a non-answer, given with a smile. And that was as far as he was going to go, and it was as far as we could go at that time.”

Other journalists had the same experience when Skilling resigned. He and Lay would not go beyond citing “personal reasons.” (Skilling did subsequently concede that the sharp decline in Enron’s stock price, from a high of $90 in August 2000 to $42.15 the day before he quit, played a significant role in his decision.)

“We felt that unless he was really sick . . . there was something fishy, and we did some reporting and we talked to both of them, on and off the record . . . but we couldn’t get any more,” says Steve Shepard, editor in chief of Business Week magazine.

James Cramer, co-host of CNBC’s “America Now,” wrote in his column at https://www.thestreet.com on the day Skilling left: “If Enron isn’t disclosing what the reasons for the resignation are, we have to presume that it is something so horrendous and horrible that we can’t own the stock. I know I won’t touch it.”

Peter Eavis, senior columnist for the Web site, had raised questions about Enron’s financial status three months before Skilling quit and again a month before he resigned.

Most critics of the media say that if other reporters weren’t already alerted to potential problems at Enron, they certainly should have put on their gumshoes after Skilling left.

“He was the architect of all their major strategies, and we should have been a lot more vigilant when he left so soon,” Shepard says. The editors of the two biggest newspapers in Texas, the Dallas Morning News and Enron’s hometown Houston Chronicle, say they, in particular, should have pursued the Enron story much more aggressively.

But less than a month after Skilling’s resignation, terrorists attacked the United States, and that story quickly seized the attention--and the resources--of most news organizations.

The Wall Street Journal is primarily a business newspaper, though, and while its staff devoted enormous time and effort to the terrorist attacks on the World Trade Center and the Pentagon, Journal reporters vigorously pursued Enron too.

Smith and John Emshwiller, a respected investigative reporter at the Journal, began digging. Two months later, when Enron reported a $1.01-billion after-tax charge, resulting in the $618-million third-quarter loss, Smith and Emshwiller already had in their possession internal Enron documents concerning limited partnerships that had been run by the company’s chief financial officer. That, they wrote in the next day’s paper, “raises anew vexing conflict-of-interest questions.”

The day their story ran, Enron stock dropped 10%, to $32 a share.

Most other mainstream news media did not immediately follow up on either the Enron disclosures or the Journal story. The Los Angeles Times, for example, which had aggressively covered the controversies surrounding Enron during California’s energy crisis earlier last year, didn’t publish a story on Enron’s third-quarter loss until two days after it was reported, and even then gave it only four sentences as the second item in a markets roundup.

The New York Times, widely regarded as having the best business section of any general-interest newspaper, wound up crediting the Journal when it began to accelerate its own Enron coverage last fall.

Smith and Emshwiller continued to report and to write and to push Enron executives to say more than they customarily had--and Enron’s stock price continued to drop. It fell for 10 straight days, closing at $11.16--a plunge of 65%--before rallying briefly and then nose-diving into oblivion; it was 26 cents a share Dec. 2, when the company filed for Chapter 11 bankruptcy protection.

Even that cataclysmic event--the collapse of the seventh-largest company in the country in an already shaky economy--wasn’t big news in most of the mainstream media. It merited only two sentences on the ABC, CBS and NBC evening news shows and didn’t make Page 1 in the Washington Post, Boston Globe, Philadelphia Inquirer, USA Today, Denver Post or Detroit Free Press, among many others. (It did make Page 1 of the New York Times, Los Angeles Times, Dallas Morning News and Houston Chronicle, though, among others.)

The financial press jumped on the bankruptcy story, but it wasn’t until early this year that Enron became a Page 1 story. The widespread coverage began after Enron’s accounting firm, Andersen, admitted destroying documents and it was revealed that the company had more than 3,500 partnerships, several hundred of them in offshore operations. The federal government began investigating, Enron insiders began talking, internal documents began leaking and most of the mainstream media picked up on the story as a political scandal.

“Journalists love politics, and they tend to see the world in terms of politics,” says Lichter of the Center for Media and Public Affairs.

Indeed, several major newspapers--the Wall Street Journal, New York Times, Los Angeles Times and Washington Post--printed stories about Enron’s contributions to, influence on and/or connections with the Bush administration long before the company’s financial problems became news.

“Major newspapers are just not going to devote the resources to a business scandal that they’ll devote to a political scandal,” Fortune’s Nocera says.